SEC News Digest

Commission announcements

SEC Enforcement Director's Statement on Citigroup Case

The Securities and Exchange Commission’s Director of the Division of Enforcement, Robert Khuzami, today made the following statement on the Citigroup case:

Last month, a federal district court declined to approve a consent judgment because, in its view, the underlying allegations were ‘unsupported by any proven or acknowledged facts.’ As a result, the court rejected a $285 million settlement between the SEC and Citigroup that reasonably reflected the relief the SEC would likely have obtained if it prevailed at trial.

We believe the district court committed legal error by announcing a new and unprecedented standard that inadvertently harms investors by depriving them of substantial, certain and immediate benefits. For this reason, today we filed papers seeking review of the decision in the U.S. Court of Appeals for the Second Circuit.

We believe the court was incorrect in requiring an admission of facts — or a trial — as a condition of approving a proposed consent judgment, particularly where the agency provided the court with information laying out the reasoned basis for its conclusions. Indeed, in the case against Citigroup, the SEC filed suit after a thorough investigation, the findings of which were described in extensive detail in a 21-page complaint.

The court’s new standard is at odds with decades of court decisions that have upheld similar settlements by federal and state agencies across the country. In fact, courts have routinely approved settlements in which a defendant does not admit or even expressly denies liability, exactly because of the benefits that settlements provide.

In cases such as this, a settlement puts money back in the pockets of harmed investors without years of courtroom delay and without the twin risks of losing at trial or winning but recovering less than the settlement amount - risks that always exist no matter how strong the evidence is in a particular case. Based on a careful balancing of these risks and benefits, settling on favorable terms even without an admission serves investors, including investors victimized by other frauds. That is due to the fact that other frauds might never be investigated or be investigated more slowly because limited agency resources are tied up in litigating a case that could have been resolved.

In contrast, the new standard adopted by the court could in practical terms press the SEC to trial in many more instances, likely resulting in fewer cases overall and less money being returned to investors.

To be clear, we are fully prepared to refuse to settle and proceed to trial when proposed settlements fail to achieve the right outcome for investors. For example, in the cases that the SEC identifies as core financial crisis cases, we filed unsettled actions against 40 of the 55 (70 percent) of the individuals charged — including the action filed against Brian Stoker in this matter. Similarly, we filed unsettled actions against 11 of the 26 (42 percent) of the entities we charged — eight of which we did not litigate against because they were bankrupt, defunct or no longer operating.

In deciding whether to settle, the SEC considers, among other things, limitations under the securities laws. In a case like Citigroup, the applicable statute does not entitle the SEC to recover the amount lost by investors. Instead, in addition to recovering a defendant’s ill-gotten gains, the statute allows a monetary penalty only up to the amount of a defendant’s gain.

The $285 million obtained from Citigroup under the proposed settlement, while less than investor losses, represents most of the total monetary recovery that the SEC itself could have sought at trial. An SEC settlement does not limit the ability of injured investors to pursue claims for additional relief.

Moreover, while the court alluded to Citigroup’s size, the law does not permit the Commission to seek penalties based upon a defendant’s wealth. (Press Rel. 2011-265).

The Securities and Exchange Commission today charged a father and son in Utah with securities fraud for selling purported investments in their real estate business that turned out to be nothing more than a wide-scale $220 million Ponzi scheme.

The SEC alleges that Wendell A. Jacobson and his son Allen R. Jacobson operate from a base in Fountain Green, Utah, and offer investors the opportunity to invest in limited liability companies (LLCs) in order to share ownership of large apartment communities in eight states. The Jacobsons solicit investors personally and through word of mouth, and appear to be using their memberships in the Church of Jesus Christ of Latter-Day Saints to make connections and win over the trust of prospective investors.

The SEC alleges that the Jacobsons represent that they buy apartment complexes with low occupancy rates at significantly discounted prices. They then renovate them and improve their management, and aim to resell them within five years. Investors are said to share in the profits derived from rental income at the apartment complexes as well as the eventual sales. But in reality, the LLCs are suffering significant losses and the Jacobsons are merely pooling the money raised from investors into large bank accounts from which they are siphoning money to pay family expenses and the operating expenses of their various companies. They also are paying earlier investors with funds received from new investors in classic Ponzi scheme fashion.

After filing its complaint today in federal court in Salt Lake City, the SEC obtained an emergency court order freezing the assets of the Jacobsons and their companies.

“Wendell and Allen Jacobson misled investors to believe they were financially supporting what was portrayed as a widespread and reputable operation to revamp apartment communities and turn a significant profit,” said Ken Israel, Director of the SEC’s Salt Lake Regional Office. “Their promises were anything but truthful.”

According to the SEC’s complaint, the Jacobsons raised more than $220 million from approximately 225 investors through a complex web of entities under the umbrella of Management Solutions, Inc. They have operated the fraudulent scheme since at least 2008. They sold the securities in the form of investment contracts without filing any registration statement with the SEC as required under the federal securities laws. Wendell and Allen Jacobson are acting as unregistered brokers in connection with their offers and sales of membership interests in LLCs.

The SEC alleges that the Jacobsons falsely assure investors that the principal amount of their investment will be safe, and their funds will be used to acquire, rehabilitate, and manage certain identified properties. Investors are promised annual returns ranging from 5 to 8 percent per year depending upon the particular apartment complexes pertaining to their LLC, with additional profits promised when the properties are sold. Wendell and Allen Jacobson tell investors that their funds are designated for a particular LLC. Wendell Jacobson has told investors that only one time has he ever lost money on a property, and on that occasion he covered the loss personally so that investor returns would not be reduced.

According to the SEC’s complaint, investor funds are never held and used exclusively to acquire, rehabilitate, and operate rental properties as represented by the Jacobsons. In fact, the LLCs are experiencing significant net losses. Nevertheless, the LLCs continue to pay returns to investors, falsely leading those investors to believe their LLCs are operating at a profit. When investor funds are received, they are almost always transferred or pooled immediately in accounts of various Jacobson-owned entities, most commonly in the account of Thunder Bay Mortgage Company. Investor funds are then used for a variety of purposes that have not been disclosed to investors.

The SEC further alleges that on numerous occasions since Jan. 1, 2010, investors have been told that the property owned in their LLC has been sold, and that they have realized a profit on the sale. In fact, those properties were not sold, and the Jacobsons used the alleged “sales” as a means of shifting investors into and out of certain properties. They have essentially been operating a shell game intended to raise additional funds from new or existing investors in order to meet the rapidly growing financial obligations of their operation.

The SEC’s complaint charges Wendell and Allen Jacobson with violating Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933 and Sections 10(b) and 15(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder as well as disgorgement of ill-gotten gains, prejudgment interest and financial penalties. The Honorable Bruce S. Jenkins granted the SEC’s request for a temporary restraining order, asset freezes, appointment of a receiver and other emergency relief to prevent the Jacobsons from continuing to solicit investments in the Management Solutions program. The SEC seeks permanent injunctive relief, disgorgement and financial penalties against Management Solutions and the Jacobsons.

The SEC’s investigation was conducted by Alison Okinaka, Scott Frost, Paul Feindt and Norm Korb in the Salt Lake Regional Office. The litigation will be headed by Dan Wadley and Tom Melton.

The SEC thanks the U.S. Attorney’s Office for the District of Utah, Federal Bureau of Investigation, and Internal Revenue Service for their assistance in this matter.

Enforcement Proceedings

In the Matter of Abviva, Inc.

An Administrative Law Judge has issued an Order Making Findings and Revoking Registrations by Default (Default Order) in Abviva, Inc., Admin. Proc. No. 3-14634. The Order Instituting Proceedings alleged that Respondents repeatedly failed to file required annual and quarterly reports while their securities were registered with the Securities and Exchange Commission. The Default Order finds these allegations to be true and revokes the registration of each class of registered securities of Abviva, Inc., ACTIS Global Ventures, Inc., aeroTelesis, Inc., Amwest Insurance Group, Inc., and Auto Underwriters of America, Inc., pursuant to Section 12(j) of the Securities Exchange Act of 1934. (Rel. 34-65956; File No. 3-14634)

Christopher T. Paganes Sanctioned

Christopher T. Paganes (Paganes) has been barred from association with any broker, dealer, or investment adviser. The sanctions were ordered in an administrative proceeding before an administrative law judge, following a court-ordered injunction against him. In June 2011, Paganes was enjoined from violating the antifraud provisions of the federal securities laws based on his involvement in the fraudulent use of investor proceeds in a Florida-based hedge fund, Vestium Equity Fund, LLC. (Rel. 34-65957; IA-3335; File No. 3-14473)

In the Matter of Ahmed Awan

On December 15, 2011 the Commission issued an Order Instituting Administrative Proceedings Pursuant to Section 15(b) of the Securities Exchange Act of 1934, Making Findings, and Imposing Remedial Sanctions (“Order”) against Ahmed Awan, a former registered representative associated with various registered and unregistered broker-dealers. The Order finds that on November 30, 2011, a final judgment was entered by consent against Awan in the civil action entitled SEC v. OCC Holdings et al., 04 Civ. 1122 (SDNY), permanently enjoining him from future violations of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5 thereunder.

The Commission’s complaint alleged, among other things, that, in 2002, while associated with a broker-dealer, Awan made material misrepresentations and omitted material facts in the sale of promissory notes to investors as part of a fraudulent scheme orchestrated by co-defendants Khurram Tanwir and Alan Labineri.

The Order bars Awan from association with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization and prohibits him from participating in any offering of a penny stock. Awan consented to the issuance of the Order, without admitting or denying any of its findings, except he admitted to the entry of the final judgment. (Rel. 34-65961; File No. 3-14664)

In the Matter of Yakov Koppel

On December 15, 2011 the Commission issued an Order Instituting Administrative Proceedings Pursuant to Section 15(b) of the Securities Exchange Act of 1934, Making Findings, and Imposing Remedial Sanctions (“Order”) against Yakov Koppel, a former registered representative associated with various registered and unregistered broker-dealers. The Order finds that on November 30, 2011, a final judgment was entered by consent against Koppel in the civil action entitled SEC v. OCC Holdings et al., 04 Civ. 1122 (SDNY), permanently enjoining him from future violations of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5 thereunder.

The Commission’s complaint alleged, among other things, that, in 2002, while associated with a broker-dealer, Koppel made material misrepresentations and omitted material facts in the sale of purported private placement securities and promissory notes to investors as part of a fraudulent scheme orchestrated by co-defendants Khurram Tanwir and Alan Labineri.

The Order bars Koppel from association with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization. Koppel consented to the issuance of the Order, without admitting or denying any of its findings, except he admitted the entry of the final judgment. (Rel. 34-65962; File No. 3-14665)

In the Matter of RetireHub, Inc. and Sunil K. Bhatia

On December 15, 2011, the Commission issued an Order Instituting Administrative and Cease-and-Desist Proceedings Pursuant to Sections 203(e), 203(f) and 203(k) of the Investment Advisers Act of 1940, Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order against Boston, Massachusetts based investment adviser, RetireHub, Inc. and its chief executive officer, Sunil K. Bhatia.

According to the Order, between 2003 and 2010, RetireHub and Bhatia filed with the Commission Forms ADV with materially inaccurate statements, including false bases for registration with the Commission. The Order finds that all of RetireHub’s Forms ADV inaccurately stated that the firm was an Internet investment adviser, a term defined in the Investment Advisers Act of 1940 (Advisers Act). According to the Order, RetireHub did not qualify as an Internet investment adviser because, from 2003 to 2007, RetireHub was not providing investment advice to users through an interactive website, and, from 2007 to 2010, it did not provide investment advice exclusively through its website. In addition, according to the Order, certain of RetireHub’s Forms ADV inaccurately stated that RetireHub had more than $25 million in assets under management and inflated the number of the firm’s accounts. The Order finds that RetireHub misrepresented the nature of its services by falsely stating in Form ADV filings that RetireHub provided continuous and regular supervisory services to its clients. Furthermore, according to the Order, RetireHub did not file its required annual Form ADV amendments in 2004, 2006, 2007 and 2009.

By virtue of its conduct, RetireHub willfully violated Sections 203A, 204 and 207 of the Advisers Act and Rule 204-1 thereunder. Bhatia willfully violated Section 207 of the Advisers Act and willfully aided and abetted and caused RetireHub’s violations of Sections 203A and 204 of the Advisers Act and Rule 204-1 thereunder.

Based on the above, the Order (i) censures RetireHub and Bhatia; (ii) orders RetireHub and Bhatia to cease and desist from committing or causing any violations and any future violations of Sections 203A, 204 and 207 of the Advisers Act and Rule 204-1 promulgated thereunder; and (iii) orders Bhatia to pay a civil money penalty in the amount of $25,000. RetireHub and Bhatia consented to the issuance of the Order without admitting or denying any of the findings. (IA-3337; File No. 3-14666)

Commission Obtains Asset Freeze and Other Relief in $220 Million Offering Fraud

On December 15, 2011, the Securities and Exchange Commission obtained a temporary restraining order and an emergency asset freeze in a $220 million real estate based offering fraud and Ponzi scheme orchestrated by Wendell A. Jacobson and Allen R. Jacobson through Management Solutions, Inc. and over 200 other entities controlled by the Jacobsons. In addition to the asset freeze, the court has appointed a receiver to preserve and marshal assets for the benefit of investors.

The complaint alleges that Wendell Jacobson and his son Allen Jacobson operate from a base in Fountain Green, Utah, and offer investors the opportunity to invest in limited liability companies (LLCs) in order to share ownership of large apartment communities in eight states. It is alleged that the Jacobsons have been soliciting investors personally and through word of mouth and appear to be using their memberships in the Church of Jesus Christ of Latter-Day Saints to make connections and win over the trust of prospective investors. The complaint further alleges the Jacobsons have been representing that they buy apartment complexes with low occupancy rates at significantly discounted prices, renovate the properties, improve their management, and aim to resell them within five years. Investors are promised they will share in the profits derived from rental income at the apartment complexes as well as the eventual sales. However, it is alleged that in reality the LLCs are suffering significant losses and the Jacobsons are merely pooling the money raised from investors into large bank accounts from which they are siphoning money to pay family expenses and the operating expenses of their various companies. They also are allegedly paying earlier investors with funds received from new investors in classic Ponzi scheme fashion.

The Commission’s complaint charges Management Solutions and the Jacobsons with violations of Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933 and Section 10(b) of the Exchange Act of 1934 (Exchange Act) and Rule 10b-5 thereunder, and charges the Jacobsons with violations of Section 15(a) of the Exchange Act. The complaint seeks a preliminary and permanent injunction as well as disgorgement, prejudgment interest and civil penalties from Management Solutions and the Jacobsons. SEC v. Management Solutions, Inc, Wendell A. Jacobson and Allen R. Jacobson, Case No. 2:11-cv-01165 BSJ (USDC Utah, Filed December 15, 2011)(LR- 22195)

In the Matter of Kenneth Suarez

On December 15, 2011, the Commission announced the issuance of an Order Instituting Administrative Proceedings Pursuant to Section 15(b) of the Securities Exchange Act of 1934 and Section 203(f) of the Investment Advisers Act of 1940, Making Findings, and Imposing Remedial Sanctions (Order) against Kenneth Suarez, age 60 and a resident of Staten Island, New York. The Order finds that from September 2003 to May 2007, he was a securities lending representative with Schonfeld Securities, LLC (Schonfeld), a broker-dealer registered with the Commission, and from August 2007 to April 2009 he was employed as a securities lending representative with Wedbush Morgan Securities, Inc., a broker-dealer and investment adviser registered with the Commission. The Order further finds that on October 3, 2008, Suarez pled guilty to two counts of conspiracy to commit securities and wire fraud in violation of Title 18 United States Code, Sections 1348 and 1349 before the United States District Court for the Eastern District of New York, in United States v. Ken Suarez, Crim. No. 08-337. He was sentenced to serve 5 years probation and ordered to make restitution in the amount of $391,187. The counts of the criminal information to which Suarez pled guilty alleged, interalia, that Suarez knowingly and intentionally conspired to execute a scheme to defraud Schonfeld and others by means of false and fraudulent pretenses, representations and promises, and to deprive Schonfeld and others of the right to honest services of their employees, in connection with securities of issuers with a class of securities registered under Section 12 of the Exchange Act.

Based on the above, the Order bars Suarez from association with any broker, dealer or investment adviser. Suarez consented to the issuance of the Order without admitting or denying any of the Commission’s findings, except his guilty plea on October 3, 2008. (Rel. 34- 65981; File No. 3-14667).

In the Matter of Kevin King

On December 15, 2011, the Commission announced the issuance of an Order Instituting Administrative Proceedings Pursuant to Section 15(b) of the Securities Exchange Act of 1934 and Section 203(f) of the Investment Advisers Act of 1940, Making Findings, and Imposing Remedial Sanctions (Order) against Kevin King, age 56 and a resident of Freehold, New Jersey. The Order finds that from May 1997 to January 2005, King worked as a securities lending representative at Van der Moolen Specialist USA, LLC, a broker-dealer registered with the Commission and from June 2006 to September 2008 he was a securities lending representative at KDC Merger Arbitrage Fund, LP, a broker-dealer and investment adviser registered with the Commission. The Order further finds that on July 21, 2009, King pled guilty to one count of conspiracy to commit securities and wire fraud in violation of Title 18 United States Code, Section 1349 before the United States District Court for the Eastern District of New York, in United States v. Kevin King, Crim. No. 09-464. The count of the criminal information to which King pled guilty alleged, interalia, that King knowingly and intentionally conspired to execute a scheme to defraud VDM and others by means of false and fraudulent pretenses, representations and promises, and to deprive VDM and others of the right to honest services of their employees, in connection with securities of issuers with a class of securities registered under Section 12 of the Exchange Act.

Based on the above, the Order bars King from association with any broker, dealer or investment adviser. King consented to the issuance of the Order without admitting or denying any of the Commission’s findings, except his guilty plea on July 21, 2009. (Rel. 34- 65982; File No. 3-14668)

In the Matter of Ronald Garcia

On December 15, 2011, the Commission announced the issuance of an Order Instituting Administrative Proceedings Pursuant to Section 15(b) of the Securities Exchange Act of 1934, Making Findings, and Imposing Remedial Sanctions (Order) against Ronald Garcia, age 63 and a resident of Hudson, New York. The Order finds that from June 2006 to November 2007, he was a securities lending representative associated with Strong City Securities, LLC, a broker-dealer registered with the Commission. The Order further finds that on December 22, 2009, Garcia pled guilty to one count of conspiracy to commit securities fraud in violation of Title 18 United States Code, Section 1349 before the United States District Court for the Eastern District of New York, in United States v. Ronald Garcia, et. al., Crim. Indictment No. 08-CR-675. He was sentenced to 3 years probation, 150 hours of community service and ordered to make restitution in the amount of $300,422. The count of the criminal indictment to which Garcia pled guilty alleged, interalia, that Garcia did knowingly and intentionally conspire to execute a scheme and artifice to defraud and obtain money and property from Schonfeld Securities, LLC and others (Schonfeld) and others by means of false and fraudulent pretenses, representations and promises, and to deprive Schonfeld and others of its right to honest services of its employees, in connection with securities of issuers with a class of securities registered under Section 12 of the Securities Exchange Act of 1934.

Based on the above, the Order bars Garcia from association with any broker or dealer. Garcia consented to the issuance of the Order without admitting or denying any of the Commission’s findings, except his guilty plea on December 22, 2009. (Rel. 34-65983; File No. 3-14669)

In the Matter of Juan Carlos Guillen Zerpa

The Commission announced the issuance of an Order suspending Juan Carlos Guillen Zerpa from appearing or practicing before the Commission pursuant to Rule 102(e)(2) of the Commission’s Rules of Practice. Guillen Zerpa has been licensed as a certified public accountant in the Bolivarian Republic of Venezuela since 1989.

The Commission’s forthwith suspension against Guillen Zerpa is based on a December 14, 2011 judgment of criminal conviction entered against him in United States v. Juan Carlos Guillen Zerpa, 3:11-cr-76 (SRU), in the United States District Court for the District of Connecticut, finding him guilty of one count of conspiracy to obstruct an official proceeding. In the conspiracy to obstruct justice conviction, Guillen Zerpa was found to have conspired with others to obstruct and impede a formal Commission investigation.

On December 14, 2011, a judgment was entered against Guillen Zerpa sentencing him to 14 months incarceration, two years supervised release and ordering him to pay a $10,000 fine. He was also ordered to forfeit $315,000. (Rel. 34-65985; File No. 3-14670)

Investment company act releases

Bandon Capital Management, LLC and Northern Lights Fund Trust

An order has been issued on an application filed by Bandon Capital Management, LLC and Northern Lights Fund Trust for an exemption from Section 15(a) of the Investment Company Act of 1940 (Act) and Rule 18f-2 under the Act. The order permits the applicants to enter into and materially amend subadvisory agreements without shareholder approval. (Rel. IC-29882 - December 13)

Self-Regulatory Organizations

Immediate Effectiveness of Proposed Rule Changes

A proposed rule change submitted by NASDAQ OMX PHLX LLC relating to Qualified Contingent Cross Orders (SR-Phlx-2011-171) has become effective pursuant to Section 19(b)(3)(A) of the Securities Exchange Act of 1934. Publication is expected in the Federal Register during the week of December 19. (Rel. 34-65945)

A proposed rule change submitted by NASDAQ OMX PHLX LLC relating to the Option Floor Broker Subsidy (SR-Phlx-2011-168) has become effective pursuant to Section 19(b)(3)(A) of the Securities Exchange Act of 1934. Publication is expected in the Federal Register during the week of December 19. (Rel. 34-65946)

Securities Act Registrations

The following registration statements have been filed with the SEC under the Securities Act of 1933. The reported information appears as follows: Form, Name, Address and Phone Number (if available) of the issuer of the security; Title and the number and/or face amount of the securities being offered; Name of the managing underwriter or depositor (if applicable); File number and date filed; Assigned Branch; and a designation if the statement is a New Issue.

Amendments to the Registrant's Code of Ethics, or Waiver of a Provision of the Code of Ethics

5.06

Change in Shell Company Status

6.01

ABS Informational and Computational Material.

6.02

Change of Servicer or Trustee.

6.03

Change in Credit Enhancement or Other External Support.

6.04

Failure to Make a Required Distribution.

6.05

Securities Act Updating Disclosure.

7.01

Regulation FD Disclosure

8.01

Other Events

9.01

Financial Statements and Exhibits

8-K reports may be viewed in person in the Commission's Public Reference Branch at 100 F Street, N.E., Washington, D.C. To obtain paper copies, please refer to information on the Commission's Web site at http://www.sec.gov/answers/publicdocs.htm. In most cases, you can view and download this information by using the search function located at http://www.sec.gov/edgar/searchedgar/companysearch.html.